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Holiday let in the countryside

Have you always dreamt of owning your own holiday home? Somewhere you and your family can relax and spend time together, as well as earn an extra income from letting it out to guests? The good news is a holiday let mortgage could help you realise your dream, boost your revenue stream and it has tax benefits too!

Understanding any mortgage process is daunting, but more so if your intent is to use your property as a holiday let. If you qualify as a Furnished Holiday Let, you will need a specific type of mortgage. Here is our guide to everything you need to know when buying a holiday cottage and applying for a holiday let mortgage.

A complete guide to holiday let mortgages

Use the quick links below for specific details or continue reading our comprehensive guide to holiday let mortgages:

What is a holiday let mortgage?

what is a holiday let mortgage?

A holiday let mortgage is specifically designed for an owner to borrow money in order to purchase a property that will be for personal use, as well as let out on a short-term basis for holiday guests. Understanding the difference between the types of mortgages available to you as a holiday home owner is imperative.

To make sure you qualify as a holiday let, rather than a buy-to-let, there are a number of specific criteria. For a far more detailed look into the requirements of qualifying, read our Furnished Holiday Let tax guide.

The difference between a holiday let mortgage, ‘buy-to-let’ and second home mortgage

The type of mortgage you will need for your holiday home and where you get it from will depend on how you intend to use the property.

  • Holiday let mortgage: Owning a holiday cottage where the intention is to use it for yourself, family and friends, but also let it out to guests/tourists for a profit for the remaining weeks of the year means that you will require a holiday let mortgage.
  • Second home mortgage: If your holiday home will be exclusively for your private use, it is considered to be a second home. This requires a residential mortgage. It is important to note that you won’t be able to let your property out to guests.
  • Buy-to-let mortgage: If your intention is to rent out your holiday home for extended periods, where short and long-term tenancy agreements are set out, this will qualify as a buy-to-let mortgage.

It is vitally important that you understand the difference between which type or mortgage you qualify for. There are implications involved in what costs can be offset against profit as well as far more stringent assessment criteria if applying for a buy-to-let.

What are the benefits of a holiday let mortgage?

  • Tax benefits of holiday let mortgages: The big attraction of a holiday let mortgage is how the government views the income received from its rental. As long as you qualify as a Furnished Holiday Let, the government classes this as a business, meaning you can deduct certain expenses from your rental income before you are assessed for tax.
  • Offset interest: This also means that you can offset the interest you pay on your holiday let mortgage against your holiday let income. As an example, if your holiday cottage made £10,000 and the interest on your mortgage was £8,000, you would only have to pay tax on the difference of £2,000!
  • Flexible financing: Another great thing about a holiday let mortgage, is that it takes into consideration that your property will be rented out for shorter periods and bookings will be very seasonal. Far more flexible financing is generally on offer for holiday let mortgages.

Holiday let mortgage lending criteria

Most mortgage providers will assess each case according to various criteria. Your credit history, income, property type as well as your current mortgage commitments (if applicable) will be taken into consideration.

Financing, rates and requirements all differ between the various lenders. Bear in mind that lenders will require details on your personal expenditure, cross-referencing tax returns and rental bank statements.

Holiday let mortgage lenders

Being a niche area of finance dependent on specific requirements, there are organisations who offer tailored mortgages for holiday lets.

While it is possible to manage the process yourself, to find and approach a lender and get a mortgage on your own, it’s always a good idea to get professional mortgage advice. A regulated financial advisor can research the market for you and help you through the application process, so you don’t have to do it alone.

Whether you are a first-time buyer or already own a holiday cottage it’s beneficial having a holiday let mortgage broker to explain the charges and fees. As well as guide you through the process of choosing the best lender for your needs.

Step-by-step guide to getting a holiday let mortgage

Step 1: Work out your budget

Price range/loan amount: You’ve decided that you are ready to start the search for your holiday cottage. You know that you meet the criteria to qualify for a holiday let mortgage, so the next step is to work out your budget.

You don’t need to have chosen a specific property at this stage, but you do need to have a price range in mind. This will naturally determine the type of property and what location you can afford.

Holiday let mortgage deposit: A deposit on a property is one of the biggest costs to consider. Having a deposit is a requirement from any lender in order to grant you a mortgage.

The amount of deposit that the mortgage company require will be dependent on various factors as set out by the mortgage financer. As a furnished holiday let generating an income, lenders will class this as a full holiday let property or business and you’re likely to need a deposit of 25%.

Holiday let mortgage rates: Part of working out an accurate budget will require you to consider the lending rate at the time you are searching for your mortgage.

These will vary according to the amount of deposit, your expected rental income, credit history, your personal income and other various factors. Depending on whether it’s your first holiday home or you have a portfolio, lender rates will also differ. At present rates are around 2% to 4% depending on the size of your deposit.

Step 2: Choose your holiday let mortgage provider

Choosing the right mortgage provider can be a complex process, but it’s a vital step that affects your finances and whether or not you are able to purchase a property.

In order for a lender to consider your request, you will need to provide key information and documentation including the following:

  • Credit history
  • Income
  • Property type
  • Other mortgage commitments
  • Proof of deposit

Financial institutions will need a proof of deposit, and the source of the holiday let mortgage deposit funds. The proof needs to be in the form of a formal confirmation letter from the relevant bank or investment company.

Before you begin the journey of choosing the perfect holiday cottage, it is worth agreeing with your lender – in principle – to give you a mortgage, subject to final checks and approval of the property you intend to buy. This is also referred to as an ‘agreement in principle’ or ‘AIP’.

Step 3: Choosing the right property

Find the right property - view of Dartmouth

The key to finding out whether your chosen property is the right one for you will depend on research. Considering factors such as location, parking, local amenities, views and even if you intend to make your holiday let dog-friendly. These will all impact the potential return on investment and what amount you will be lent.

Once you have this information, you should be able to accurately work out your potential income and outgoings. If you are thinking of buying a holiday home in South Devon, our local New Property Consultant team work closely with experienced local estate agents and are able to assist in providing detailed information on all aspects of holiday let income and expenses. They can also let you know if any of the fantastic established properties we currently let are up for sale.

Read our blog on the cost of running a holiday let for a general overview of what to expect.

Step 4: Formal holiday let mortgage application

Once you have found the property which meets your requirement as well as budget, and the offer has been accepted, there are various criteria that need to be satisfied in order for the mortgage to be agreed. The property will need a valuation to confirm that the home is worth what you intend to pay for it.

Lenders then conduct a thorough credit search and confirm the documentation you provided is in order. Once a formal mortgage offer has been agreed, your conveyancer arranges the funds to be transferred to the seller on the day of completion.

Step 5: Choosing your holiday home management agency in South Devon

You now have your perfect holiday cottage and are ready to let it out to guests. This can seem as much a daunting task as it was securing a holiday let mortgage.

Whether you are a first-time holiday cottage owner or already have holiday lets, choosing the services of an experienced and reputable holiday home management agency is the first step towards running a successful business. Coast & Country Cottages are able to guide you through preparing your home for guests, marketing your property and administering bookings.

Whether you choose to be hands-on or prefer to have the hassle taken out of the day-to-day running of your holiday let, we have an option to suit you. To make your letting journey as easy as possible, the following property owner guides may be useful to you:

Thinking of buying a holiday home in South Devon?

At Coast and Country Cottages, we are fully committed to providing both our customers and holiday home owners with the highest possible levels of service.

Over the past 20 years, we’ve assisted many owners when buying and setting up their holiday homes in South Devon. Our local team in Salcombe (01548 843773) and Dartmouth (01803 839499) are on hand to provide you with all the knowledge and support you’ll need.

To find out more about the holiday letting services we offer, visit our Let Your Cottage page to order a copy of our free Owners Guide.

Request your Owners Guide

* At the time of publishing (Jan 2022), Coast & Country Cottages has taken all reasonable care to ensure that the information contained in this article is accurate. However, no warranty or representation is given that the information is complete or free from errors or inaccuracies. Generic information is contained within this article and each individual’s financial affairs are different, further advice should be sought from a mortgage broker.